An Interview with Markus Lampinen, COO of GrowVC

Editor's Note: The following interview with Markus Lampinen, COO of GrowVC, was conducted by Tim Wright, Director and Co-Founder of twintangibles. The audio recording and transcript are re-posted here with permission.

TRANSCRIPT:

Where does GrowVC come from, when did it start and what is your particular involvement with it?

So, first of all a little bit about our background at GrowVC. In our founding team we have lots of entrepreneurs. We have people that have been through the path of an entrepreneur and also the path of an investor investing in startups. I think we have tens and tens of year in experience in entrepreneurship in our founding team so we have seen the ups and downs of entrepreneurship especially with entrepreneurs looking for funding, and with the rise of models such as Kiva and later Kickstarter and IndieGoGo and so on we saw that the time was right to do something about these issues. So this was back in 2008 when we started looking at entrepreneurs, raising capital but also from the other side of the table at investors looking for the right deal to invest in. And we recognised with the internet that lots of the old arguments for investing were not true any more. For example the fact that lots of investors, specifically angel investors, they typically only invest locally, well even from an investors point of view you can’t guarantee that the best deals and best opportunities are in the local area. And then also for entrepreneurs this means that if they were only forced to look at their neighborhood that would really really limit the amount of exposure and the access to capital and the right people that they would have. Then coupled with the venture capital landscape where the performance of their portfolios has not been that good which has led to them being under pressure from their investments, lots of funds have also gone under in the last, let’s say 10 years. This has led VCs moving upward in their focus so fewer deals, larger deals and very much avoiding the early stages. Of course there are exceptions but on a global level these two trends were the reason we started on this mission. And of course if you look at early stage deals, there might be great opportunities, but they typically have very little information on the business itself because they don’t yet have much history, they don’t have that much traction, they don’t have data on their operating models and so forth, so it’s a huge risk for people to invest in them. So we thought of models in order to get more information, more transparency and just get the right capital to the right types of opportunities, because we thought there was a miss-match. This is very much where we started back in 2008 and of course a lot has happened since then.

Indeed, and it’s continuing to happen as we know with some of the legislative changes that have already been enacted and those that are proposed in the US that appear to clear the way a little bit more for some form of equity-based crowdfunding within the boundaries of the US. How do you think that is going to shape things for the next few years?

Well, it is definitely a very interesting question. We have been watching that closely for the past six months and we are talking with Congressman McHenry tomorrow in Los Angeles [Editor's Note: the original post was published on March 30th] so we have been very very close to that. But at the same time we have recognised that this is not a market that is going to happen overnight, this isn’t something that is a short term victory so to speak. We at GrowVC approach it from the long term perspective because we see that the reasons for new funding models being needed such as better access to capital but also for capital to better access the right deals, more efficiency, more transparency and less wasted money in this type of ecosystem. We see that definitely leads to better economic growth employment and what not. So the reasons are fundamental and they are long term. So we definitely always see it as a long term change in this ecosystem rather than something that is going to happen overnight . And we see that more as an indication than a change in itself because we have already seen that there is lots of different angles to this and even though it was one of the pieces of legislation that got bi-partisan support in this economic time when it’s very hard to get new initiatives off the ground especially with policies in the US and whatever is going on there. But we definitely see that it is strong indication for why it is so important and the fundamental reasons behind this. And the US is one country but there are similar initiatives now emerging in other countries for example Canada and the UK. So it definitely has a global trend because I think that there was some many different things that play into this entire landscape. Even the role of entrepreneurship and startups, that’s been emphasised in the last couple of years with the economic crisis and I think it is back to basics with many different nations that just look at where their long term jobs come from and where the competitive advantage of their nation actually stems from. That’s really at the core of why this is so important but also why we need to remove so many of the outdated hurdles that stand in the way of more economic growth and just more innovation.

One of the things you stress about GrowVC is that you describe it as an investor ecosystem. So you see this as much more than just a crowdfunding platform, this is an environment that brings together both the demand and supply side and it’s a very international perspective that you have as well.

Yes that’s true. I mean, we deal with I like to say 200 countries because it’s a rounder number but I often say over 196 because according to some sources there aren’t more countries that 196 but we are in virtually every country in the world except North Korea. But basically we definitely see crowdfunding is part of this ecosystem but we see that it can’t be the only part. To elaborate on this a little bit, we are building a marketplace that connects all the actors from startups to those that want to invest $20 to those that want to invest much more than $20. So for example Angel investors, Angel networks, venture capital companies, but also all the way up to larger funds like for example private equity funds and what not. But we see that by providing this, we don’t just appeal to startups and just one point in time because if a startup raises capital at its seed round that’s great, and it’s probably great for the startup and for the investors as well and that will have a substantial impact on something. But startups need more cash than just the seed round, they need then say the Series A, or even if they don’t need more cash, they are cash flow positive and they have great growth they are going to need other parts of the ecosystem, like advisory groups, stock exchanges other types of partners like distributors, depending on the business, all these different types of actors. So we always approached it so that we are kind of like a network of networks and we ourselves focus on solving the early stage problems for startups. That’s definitely our core operations. But we definitely see that by allowing other actors access to this ecosystem and by getting them involved early on what I talked about earlier on, the scarcity of information at early stages, if you have for example a startup that’s able to raise say $100,000 from 20,000 individuals or something like that, that’s already information and that’s not loans, that’s not pre-purchasing products, that’s actual investments into the company. If people actually invest their money into a company then that must signal something. At the very least you know that you have some potential evangelists, people that have vested interests in the company and this is very valuable information for other types of actors, like incubators or other types of investors like venture capitalists. So we definitely see that it has to be an ecosystem, and there has to be a global ecosystem where entrepreneurs and investors can sign up and also other types of players can sign up and participate in the ecosystem so that we can nurture innovation, not just at one point in time but rather be a kind of virtual ecosystem that connects the dots all the way from where they start and then on their path forward.

So if I were an entrepreneur with a startup I could join the GrowVC community and, essentially, what is on offer is a shop window that allows you set out your proposition and you can effectively reach out for resources of many different sorts, one of which is funding. Is that funding typically in exchange for equity or are you a different type of model?

In our platform there are indeed many models because we also recognise that one model isn’t going to work for all startups because there are so many different types of startups. But we focus on the real investment so we focus on the real equity investment. Of course since the regulation and legislation is still early on in this we have a limited service in some places like for example the US pending the regulation. But definitely the point is that you as a startup or you as an entrepreneur you can sign up to the platform, you can set up your startup profile, list your details there and then you can provide different types of information, for different types of actors, and you can manage who sees that and you can manage your investor relations so to speak. And we like to think of our tools as a kind of social investor relations management system because that is what entrepreneurs nowadays also need. Definitely we focus on the early stage funding but then via this ecosystem and via our networks programme we have different types of actors that can have different types of support that they can provide to startups, so for example we work with lots of incubators and accelerator groups, Universities, investors different funds, we even work with the World Bank in Africa. But basically the point is that we focus on the early stage funding and we provide the tools for that but our tools can be used for so many different things like for example with incubators just to manage the different startups, investors and stakeholders for example, mentors, advisors what not they might have, get everyone to have profiles, get the transparency in place but also bring the social element too. It’s something that is usually very in structured so definitely we focus on the funding and that is the big opportunity to solve, but even if a startup gets some funding it’s going to require other things, so we want to connect the dots with the different players that have interest in this space and can actually cater to the startups.

So what is a typical funding round for a startup in a GrowVC context? What could you expect to raise typically?

That depends a lot. I think since we have such a diverse audience from different countries and different types of companies, we have seen deals of tens of thousands of dollars but we have even seen deals of several millions of dollars. So definitely it depends on the type of company, the type of investors and the type of model that they use. I could actually give you a couple of examples.

That would be great.

So for example, we had one case early on – I think 2010 – that joined our platform. An entrepreneur from Australia that produced a recycling shower product. This was one of the game changer moments for us as well because he approached us saying that he had talked to lots of different venture capitalists, he had talked to lots of different investors. They all loved his product but since he is not a software company they can’t invest in his product and we saw that there was huge demand for what he is doing, huge support but this was at a time we were also figuring out who our core audience is and he, as a cleantech company, was very different. But he then proved to us definitely that it’s all about the entrepreneur. He raised $100,000 from, I think, 300 investors or something like that, from a global crowd, and this is also why it’s so important that it is actual equity investments because he is producing a recycling shower (CINTEP). He can’t presell, he has a product that is not suitable for Kickstarter for example. He actually said that if he were to try to do something like that it would bankrupt his company because he doesn’t have distribution in different countries and at the same time producing a shower is very different to writing software. So the different investors that he got on board they served as kind of feet on the ground in different markets for him, got him different types of deals for distribution, different markets. And this particular example, they are the winners of last year’s Green Challenge out of the Netherlands, so they won $700,000 and as Nick says when I talked to him, he now has 300 very happy investors. In effect they got free money. So it was a very interesting case for us to follow because it has definitely proved that even though the money is important it’s not just about the money, it’s also about the actual people that are engaged with the company that actually have something to gain by seeing the company succeed.

Then the other case that I have seen that I mentioned, I think the company was out of South America, they raised $3Million but they had 4 or 5 investors in the company. So this was more about a traditional type of investors. Those private individuals that are high net worth individuals that know the business that invest larger amounts into these types of businesses. But at the same time this was a company that the entrepreneur had lived in the US for 27 years and then moved to South America and he found it very hard to get connections there. And obviously he had strong connections in the US but obviously it was hard for him to get US based people to invest in this company which is far away in South America. So he found those connections on the platform and he was then able to raise a larger amount of money. But at the same time it was a different type of company and the investment type was of course different, it wasn’t a micro investor so to speak. But I think that company was acquired late last year so it’s also been an interesting case to each from er.. well in effect from start to finish in a way.

Both of these deals deals were closed in, I think, 7 to 10 weeks or something like that.

So that's pretty quick?

Well it is but it definitely correlates with the entrepreneur himself. People tend to think that just by putting it online the actual economics and the actual game of startup funding would change and that it wouldn’t require the hustle, whereas it definitely requires the exact same hustle but you just do it differently. So it’s more efficient, you have more tools but we like this concept of a market place. We see lots of different startups, I think currently there are about 3000 different startups in the platform that are looking for some type of funding. So definitely not all of them are going to get funding, but that’s not the point either. It’s a matter of matching the right capital with the right cases. And what we really want to do with the marketplace is improve the success rate of the actual investments by incorporating more people at the early stages.Alan from our team has this saying that “nobody is as smart as everyone”, and it’s a very powerful message, if you are actually able to leverage thousands of people at the early stages then we are betting on that, it will have an impact on the actual dynamics and success of that investment because by default you will have thousands of people that are actually rooting for the company if nothing else.

Yes and so that kind of distributed cognition acts as a kind of validation and sense check on the proposition that is being offered but also can offer tremendously diverse resource and tremendously wide reach for the potential entrepreneur. So it’s a rich mix there for you.

It is. But of course it is up to the entrepreneur to decide how they utilise that. But I would say that it is definitely a very valuable resource that you might not otherwise have.

Do you vet the entrepreneurs that come on? Do you check to see if their proposition is sound before you admit them or are you essentially letting the crowd do the vetting?

I think it’s a combination of both. We like the idea of crowd control, that we get enough people to validate cases. Of course before any micro investment deals are closed we do the normal legal due diligence – checking that everybody is who they say they are and that everything is in place – but for the actual business due diligence this type of, you know, making sure that the deal is sound, that is something that since we don’t have a crystal ball at GrowVC, we don’t want to say this is a good deal or this is a bad deal because that would be in a way a contrast to our ethos and why we actually built this platform. We want to make it a bottom up approach because if we have thousands of people who are ready to invest in some company then it must mean something. And it must be smarter than say, for example, you and I saying that’s a good company and that’s a bad company. I think it’s also part of this dilemma in the venture capital space. I remember a quote that I like very much – in the venture capital space a 70% failure rate is considered good. And that is a problem in itself. If we actually consider 70% failure is a good rate then that really says something about the industry itself. Of course it’s a hard industry, but 70% is awfully high, and if we are taking those types of gambles it would just make sense to take those types of gambles with less money and distributed early on to more cases so that we can see which work.

Yes, and I guess the other corollary of that high and aggressive risk profile is generally a high and aggressive expectation of return in the traditional model. Hence traditional investors wanting larger slices of equity, more aggressive returns in shorter periods. Whereas is you have a higher success rate you can be slightly more tempered, if you will, in terms of the aggressive expectation of return.

Definitely. And that is definitely a problem in today’s economy as well. When there are deals with like you said, for example, high stakes and high valuation, then it also forces the exit markets to move, or it limits the opportunities in the exit market for the investors, so it also restrains the entrepreneurs a lot and the path that they are on. So in a way we also like to think that we are just providing a new market place for all of the existing players. So for example venture capitalists, they have no reason to operate in the early stages because their cost structure isn’t built for that. But at the same time for them to follow on an investment that they have seen at the early stages and just watch it develop, if people invest $5000 in their company and the company does A, B and C with the $5000 and actually shows results for that, then it’s a lot easier to invest next round when they actually have traction and data on what they did before. So it’s kind of this idea that in order to be a venture capitalist or an Angel Investor you don’t have to start out investing $20,000 or $50,000 or $200,000 , you can start out by investing $20 and just seeing how it goes and then if you want to, you can invest $15,000 later on but at the same time once the company actually looks ready for the bigger investors and the bigger types of investments then it doesn’t help if you approach them at that point. It would be so much better for you as an investor if you had been in the loop earlier on with your contribution or your expertise aiding the entrepreneurs. Because when there is the next SKYPE it’s very hard to persuade the entrepreneurs to take your money at that point whereas earlier on that might be very easy.

And so in a way you are actually lowering the barrier to entry for investors as well. So there are people who could potentially get involved with this who may not be as high net worth individuals as the typical traditional investor?

Definitely. I definitely see that and there is also different models for that. You don’t have to invest early on, but just being able to see information and see the development and follow the companies, because we also talk about, for example, if you think about employees to companies, they also need to be sold on a company. Especially those that join startups that are uncertain that have their ups and downs and hurdles. Then if you actually follow the company for some time and get impressed by what they are doing, and have an ongoing banter with the founders, it definitely not only gives you an interesting opportunity for the future to be involved with the company, but it definitely gives you much more information about where you are going. And the same is true not just for employees but also to advisors, mentors. But also for example incubators looking for startups. You need to somehow be able to see the startups timeline if you will, where they have come from, what they have done. We like to think of this concept that normally when you see in an application for an incubator you get a snapshot of where that company is right now. You also get their prognosis of where they might be and so on but we like to think of our service as providing a full timeline. A video of where they have come from, what they have done and what they have actually accomplished. And this goes not just for the startups, this goes for the investors because we are big believers in transparency and we see that being transparent and providing information on all of the different types of actors, we can also not just lower the barrier to entry but we can also minimise transaction costs in these processes and make sure that people that take capital from investors know the investors track records as well. Where they can add value, what they have done before, how their other investments have worked. And that is something that you just can’t get in the traditional setting, or at least not that easily.

Indeed. You mentioned there driving down transaction costs, what is the typical sort of cost associated with raising capital through something like GrowVC?

That is a good question and I am going to give you a boring answer in that it depends a lot on lots of different things. For example the funding model, if the startup is collecting micro investors or if it is collecting private individuals or angel investors per say. But it also depends on the region. If you have a startup that has investors in different regions and so on. But we always work to minimise these so that we find the most efficient model. This means that we work with local actors on the ground. So, for example, if we have a case that in a specific region we have a certified network of different partners like advisory forms or law boutiques or whatever, that can then help on the ground. Because we can’t presume that we know what is best of who is the best partner in 200 different countries. But we definitely see that by just having this process where we do the matchmaking online, we align people’s intentions on line and then when everyone wants to see the deal made, then at that point we do the proper legal diligence , we do the work that is required in structured deals and whatever there is to do with that. But doing work up front where you don’t necessarily know if the case is going to work out or not, if a company is actually going to raise capital, then if you have a startup that is not going to be successful and is not going to raise capital and you do due diligence on that ahead of time then that is ultimately wasted capital. But this is also where the network of networks comes in. We work with different analysts and different types of companies that can certify and provide more different types of viewpoints to different types of companies. So that we can get even more information to these uncertain companies just in the early stages in general.

So to wind up, if I were an entrepreneur looking to raise some funding and find some resources to take my embryonic business on to the next stage, I am presented with a very rich and growing number of platforms that I can approach these days – certainly for crowdfunding – why would I come to GrowVC as opposed to one of the other platforms?

Well that depends of course a lot on who you are as an entrepreneur. We are in this for the long term, and we definitely want the entrepreneurs to pick the right choice for them. So there might be a reason for the entrepreneur to choose a specific platform that is perfect for them and they want to stay in that location. Then that might be the better choice for them. But the good thing is that online you can most likely try lots of different things and see what works for you. The good thing about GrowVC is that it is a very global platform. And also with these different types of networks you can also access different types of people, for different types of services. And for startups getting in the loop with the right type of people early on, those people that might be valuable for you let’s say a year into the future or a couple of years into the future and that is also incredibly powerful. But I would say that GrowVC is perfect for those that actually want to do something global but want to tap into different markets that they might not have access to right away, but once they have expanded their business and do something, grow something that is cross border and big. But at the same time there are lots of innovations out there, lots of different platforms coming up left and right. But just a word of warning with that because we’ve definitely seen the ecosystem develop over the last – let’s say – three years and there are more platforms popping up in 2012 than there has been ever before. So it’s always a good idea to check the track record and check the history, and just check the people behind the platform itself because we have seen so many companies, so many platforms, come and go already in this time that it would be a shame for an entrepreneur to waste their time on something that is going to prove redundant in the long term.

So always do your background, and do your homework in terms of other platforms but, most of the time, it’s very much just what entrepreneurs go for, or what entrepreneurs actually wish to accomplish. But GrowVC is definitely a global ecosystem and it’s something that we have put a lot of work into already but we are just getting started in terms of building that entire network of networks. I think right now we are at over 150 different networks that are actively engaged providing different types of services like incubators, accelerators, angel investors, all different types of actors that play into this startup ecosystem. That’s something that is early on but this entire market of course is still developing so I think there is lots of potential but it always takes time.

Thank you to Tim and Daniela at twintangibles for allowing us to repost this great interview.

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